My Contrarian Bones
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On Friday, I addressed my obsession with bank stocks. I get plenty of mail regarding this topic, and yes, some of you wonder if my banks stock obsession may be a little unhealthy.

The answer, yes, it's very possible that bank stocks could come back to bite me. After all, like I said Friday, any bad news headline might as well read "sell the banks." Though I would note that banks rallied after the weak payroll number Friday, which is encouraging.

If banks start climbing the wall of worry, it would be a very good sign for the stock market.

We should probably figure out why there seems to be such a sudden "about face" from institutional money regarding the banks. Because there should be no doubt that the recent surge in volume is hedge funds and mutual funds getting positioned.

Clearly, the fund guys (and gals) want to have banks on their books at the end of the year. It stands to reason that they expect gains for these stocks. But there is also a PR angle to fund holdings. If a manager thinks that potential investors will be turned off that there are bank stocks in his or her fund, then the manager will be less inclined to hold them.

So I can't help but think that sentiment is turning positive on banks. Balance sheets are still improving and dividends may not be far off.

Daily Profit reader Barry had this to say:

If you're a contrarian and like beaten down banks what better bank to check out that Bank of Ireland (IRE). Currently at giveaway prices. The only way is up.

I already told Daily Profit that Bank of Ireland (NYSE:IRE) had some upside, in the November 24 issue of Daily Profit. That was the day after Ireland formally requested a bailout, and the opening price, $1.39, that day was the low for the stock, so far.

As I said then, I'm not sure I'd hold this stock long term. The fact that it needed $114 billion when Ireland's entire GDP is $222 billion (in 2009). That sounds like a dangerous imbalance, and it makes you wonder if Bank of Ireland can ever pay off that debt. On the other hand, it would not be surprising to see the Bank of Ireland get acquired.

Nels wrote:

Here's a novel idea that will never get anywhere. How about cancelling corporate income taxes to the extent that they spend the same amount of money bringing back their manufacturing facilities to the good old USA?

We have an R&D tax credit already in place that's supposed to encourage reinvestment in the U.S. But it clearly doesn't go far enough.

Perhaps we could get reinvestment plan for repatriated profits moving in Congress...

Scott wrote to say thanks:

On Tuesday (November 30), I read your piece and had been nursing a short position on the S&P with an ETF play. Usually if I think it is time to maybe take a short view I build a position over several weeks because when it turns down the bulk of the move is quick, dramatic and hard to time so I just try to catch a piece of the move if I see it may be developing or imminent.

Anyway my position was a little better then break even with S&P hovering at the 1176-1180 support area and I was needing a move down thru it. After reading your newsletter I accepted the strength of the support and closed out at about even and went long to catch the last two days. I like your piece, it makes a lot of the news and tends more transparent.

That is great news. If the Daily Profit can help people make money, then I am happy as a clam.

If you're interested, you can read the piece that Scott is referring to HERE. The next day, the ADP payroll number sparked a huge rally.

Oscar wrote:

I've been reading your "Daily Profit" for a while now and I really enjoy the market insight you share with your readers. I would like to share with you my experience about the market if I may. I've been following and investing in stock market since 1991. I am over 50 years old and I've lost a lot of money over 100G. I subscribed to too many news letter services and didn't have a positive result. I have educated myself about the market, but now I am not as brave to enter any position as I was younger nor do I have large enough capital. I can't give up on market, because I still believe I can some day make some money. Any suggestion would be greatly appreciated. And keep up the good work.

Thanks Oscar. First, I want to tell you that you are not alone. A lot of investors are still down after the financial crisis. One of the most important things any investor can do is to educate themselves about the stock market and investing. Having your own opinion and perspective is a good thing.

I know Wall Street likes to make it sound like they are smarter than the average investor and are the only ones who can grow your money, but it's simply not true. The only real advantage they have is that they watch the market all day. That, and they understand that the market is emotional, not logical.

Taking a "sector based" approach can be helpful. Identify what is working, and is likely to work into the future (like technology, or energy, or whatever it may be) and look for opportunity in those stocks.

Finally, as a general idea, get some quality dividend stocks. Oscar is young enough for dividends, and dividend reinvestment plans (DRIPS) to work their magic.

Jeff does NOT want to hear about Citi anymore:

You state that Citicorp is 50% under valued. So Citicorp goes up by 50% from $4.42 to $6.53. Big deal that is still 5% below my cost. Spare me the tales of this dog.

My apologies, Jeff. I understand that a lot of investors are still, um, very angry at the banks. And understandably so. That's why I try to throw in a little humor when I talk about bank stocks.

But at the end of the day, I'm here to help readers make money, and I won't ignore an opportunity if I think it's a good one.





Posted 12-07-2010 4:14 PM by Ian Wyatt